CHAPTER III
IS EUROPEAN TRADE RECOVERING?
Favorable Trade Balance Necessary
The enormous disruption of the trade of Europe during the war was roughly portrayed in the discussion of the foreign exchanges in the preceding chapter. Exports were curtailed and imports were tremendously increased, with resulting huge adverse trade balances. Early in the war—it bears repeating—the excess of imports was paid for partly in gold and partly by the resale to the United States of European investments in this country. When these resources were exhausted Europe borrowed from the United States, that is to say, we shipped the goods abroad on credit, European governments agreeing to pay for the goods at some future date, after the war was over. Meanwhile the United States government paid the exporters with funds raised from the sale of Liberty bonds. At the time of the Armistice these government credits abroad amounted to nearly $9,000,000,000. They have since been increased to about ten billions; while private credits amount to three or four billions more. The United States has thus become a huge creditor nation.
Now if Europe is to retrace her steps, to restore her trade and recover her financial equilibrium, she must gradually reduce1 1If not actually reduce imports, at least expand exports until they greatly exceed imports. imports and expand exports. An individual gets out of debt by paying his debts; and it is the same with a nation. But a nation cannot pay large debts by shipping money. As the analysis of the international exchanges in the preceding chapter indicates, nations must meet their obligations abroad with either goods or services—usually the former. Hence the necessity for Europe to expand exports.
But it may be argued that it is unnecessary for Europe to wipe out the debt completely. May she not remain permanently indebted to the United States, permanently paying interest on borrowed funds? True, but at least Europe must sooner or later cease to go further into debt; and it she is to regain financial solvency she must place herself in a position where she can at least pay interest on the debt which is owed. This can be accomplished only by securing a large favorable balance of trade. No other way of relishing economic equilibrium has ever been invented.
As matters now stand it would require between Europe and the United States an excess of exports over imports of about $700,000,000 annually to meet interest charges alone. And if we assume that the debt, amounting to approximately $14,000,000,000, is to be paid off in forty years, another $300,000,000 of exports would be required annually for sinking funds.
Slow Progress Made
Let us now enquire what progress Europe has been making toward securing this necessary favorable balance of trade. It was, of course, not to be expected that much, if anything, would be accomplished in the first year following the end of the war. The prolongation of the peace negotiations, the difficult and tedious task of demobilization, and the economic prostration caused by the war, combined to render immediate progress impossible. It was inevitable, indeed, that Europe should plunge still further into debt, in order to procure the raw materials necessary for reconstruction. Until European industries should be restored and the several nations placed upon their economic feet, so to speak, it was of course idle to look for a return to a favorable trade position.
But nearly three years having passed since the conclusion of the Armistice agreement, it would seem that sufficient time has elapsed to show results. But even now little progress is to be recorded. In view of the widespread impression that Europe has been making remarkable progress toward economic rehabilitation, the following tables which show the trade of Europe as a whole with the United States are significant. The first table shows the trade since the beginning of 1920 by quarters.
European Trade with the United States (000,000 omitted)
Exports Imports Balance against
1920 to U. S. from U. S. Europe
1st quarter $344 $i,3i9 $975
2nd " 322 1,044 722
3rd " 325 948 623
4th 237 1,070 833
1921
1st quarter 191 767 576
2nd « 18s 529 344
The following figures show the monthly trend since last autumn:
(000,000 omitted)
Exports Imports Balance against
1920 to U. S. from U. S. Europe
November $82 $357 $275
December 67 389 322
1921
January 60 327 267
February 55 243 188
March 71 i99 132
April 69 174 105
May 61 177 116
June 55 178 133
If one studies only the final column in these tables he may conclude that Europe is making genuine progress toward trade recovery. Has not the adverse trade balance been materially reduced since last autumn? This is in fact the conclusion that has commonly been drawn from these foreign trade statistics.
But if one gives heed to the other columns as well, he will find the explanation of the decrease in the adverse trade balance of Europe, not in a great increase in exports and a decrease in imports, but in a great decrease in imports2 2Some allowance must be made in these aggregate figures for the fluctuations in prices that have occurred. That the decline in recent months is not mainly attributable to the mere decline in prices is, or, evident from the fact that the decline in trade has been rapid since the rate of price decline began to slow down.—exports declining also, though less rapidly. Attending this great reduction in imports from the United States is a corresponding decrease in production in Europe. And—after a brief lag—this results, among other things, in a further reduction of European exports. It should require no extensive analysis to show that if Europe cannot purchase American cotton and other raw materials, she cannot hope to maintain the volume of her exports of finished commodities. Only in slight degree is the decline in European imports attributable to the elimination of purchases of luxuries and non-essentials. The reduction is common to practically all lines; and is attributable to the business depression and the gradual exhaustion of European purchasing power.
British Foreign Trade
The above figures, however, relate only to the trade between Europe and the United States. Is it not possible that there has merely been a shifting of trade? That American loss has been the gain of other nations? Statistics of the foreign trade of leading European nations with the world as a whole will serve at once to answer this question and to reveal the precise trade situation of particular countries. The table which follows shows the trend of British trade since June, 1918:
Great Britain's Foreign Trade (£000,000 omitted)
1918 Exports
Imports Balance
3rd quarter £127
£317 £190
4th " 134 350 226
1919
1st quarter 147
347 200
2nd " 187
370 183
3rd " 206
450 244
4th " 257
467 210
1920
1st quarter 295
530 235
2nd " 342
503 161
3rd " 370
468 98
4th " 338 437 109
1921
1st quarter 228
398 170
2nd " 141
264 123
The following are the monthly figures for British trade since the autumn of 1920:
(£000,000 omitted)
Adverse
1920 Exports
Imports Balance
November £119
£144 December 97
1921
January 93
117 M
February 68
March 67
April 60
90
May 43 86
43
June 38 88
SO
The figures of adverse balance (in the final column) are here also less significant than the trends disclosed in the other columns. During 1919 and the first months of 1920, both exports and imports increased. While British students recognized that the imports remained disappointingly large, much satisfaction was derived from the steady increase in exports. Great Britain appeared to be headed in the right direction. But in the summer of 1920 the tide turned; both exports and imports began to decline. The persistence with which the progressive decline has been maintained is shown by the monthly figures since last November. The decline began long before the coal strike. It is at bottom a reflection of the world-wide depression, although the May and June figures, of course, reveal the additional disastrous consequences of the cessation of coal mining. The bottom was probably reached in June; but there is little reason to believe that the figures for the ensuing months will greatly exceed those of April.
In May, 1914, British exports were £42,000,000 and imports £52,000,000, leaving an adverse balance of only £10,000,000. Since the present British price level is almost exactly twice that of 1914, it will be seen that the present physical volume of exports is only about half what it was in May, 1914, while the present physical volume of imports is nearly equal to that before the war. The present exports for May are, moreover, scarcely equal to those of the spring of 1918, when the war strain was at its height.
French Foreign Trade
The facts as to the foreign trade of France are particularly interesting, since they have been so frequently cited of late as conclusive evidence that France is rapidly recovering her foreign trade position. The following figures taken from the Federal Reserve Bulletin, are expressed in 1919 value units; hence the fluctuations revealed are those which took place in the physical quantities:
(In francs, 000 omitted)
Adverse Exports
Imports Balance
1919, monthly average 989,966
2,983,272 i,993,306
1920, "" 1,869,563
2,950,413 1,080,850
1920
August 2,399,508
2,800,453 400,945
September 2,151,573
2,627,876 476,303
October 2,332,552
2,595,445 262,893
November 1,883,598
2,672,178 788,580
December 1,660,896
2,948,257 1,287,361
1921
January 1,882,618
1,982,468 99,850
February 1,899444
March 1,686,426
1,742,908 56,482
April 1,932,268
1,779,089 *IS3,179
May 1,648,63s 1,565,508 *83,i27
June 1,950,464 1,723,534 *246,930
July 1,563,065
1,723,534 160,469
* Favorable balance.
** The May and June figures are not converted to 1919 values. Since French prices now are about the same as in 1919, they would not
Adverse
Imports
Adverse Balance
2,983,272
1,993,306
2,950,413
1,080,850
2,800,453
400,945
2,627,876
476,303
2,595,445
262,893
2,672,178
788,580
2,948,257
1,287,361
1,982468
99,850
1,613,931
♦285,513
1,742,908
56,482
1,779,089
1,565.508
1,733,534
99,850
♦385,513 5648a
♦153,179 ♦83.127 160469
1919 values. Since French be materially altered.
It will be seen from the last column that the "great improvement" came at the beginning of 1921. It is these figures of the French trade balance that have been so widely circulated as conclusive evidence of French recovery. Let us see how much significance is to be attached to them.
Reference to the imports and exports columns reveals that the big change in trade balance that occurred in January was wholly due to a collapse of imports—from 2,948,257,000 in December, to 1,982,468,000 in January. In that month exports also fell somewhat. For the first six months of the current year imports have been only a little more than half what they were last summer and autumn. While exports have held up remarkably well, as compared with those of
Great Britain, they have nevertheless fallen; in June of this year they were only about two-thirds of what they had been last autumn. Do these figures then prove that France is coming back with giant strides, as has been contended even by eminent financiers and statesmen?
The collapse of imports might, conceivably, indicate that French purchasing power and French credit have been proportionately reduced. If this is the case, French exports will shortly show material further declines. The substantial maintenance of French exports during recent months might at the same time be explained by the familiar "lag"; the large volume of raw materials imported in the autumn would naturally not be ready for export as finished goods until some months later. The detailed figures of French imports, in fact, show that the increase of total imports during the late autumn of 1920, as compared with August, was due to increased buying of raw materials; imports of food and manufactured articles both declining.
Other factors helping to maintain the volume of French exports to date are the exportation of German coal, furnished under the Spa agreement, to fill the gap caused by the British coal strike, and export back to the United States of American war supplies "sold cheap" on credit to France after the Armistice. Neither of these, of course, bespeak increasing production in France.
Character of French Imports
The only reasoning that could lead to the conclusion that the present trade figures of France indicate an improving economic situation is that the decline in imports represents a curtailment of foreign purchasing of luxuries, on the one hand, and of foodstuffs, on the other. Do the detailed figures show that this has been the case? The data for August and December, 1920, and for June, 1921, follow:
Character of French Imports (In francs, 000 omitted)
Raw Manufactured
Food Materials Materials Total
1920, August 723.749 1,171.091 905.613 3,800453
1920, Dec 672,861 1,548,681 726,715 2,948,257
1921, June 490,615 871,374 361.54s 1,723,534
Decline per cent
since Dec, 1920.. 27 45 50 42
The largest percentage decrease in imports is in manufactured articles, which include luxuries. This evidences curtailed consumption. The next largest decrease is in raw materials, indicating that purchases of basic essentials for manufacturing are falling rapidly. The dearth of raw materials is, however, not being made good by increased production, as the falling exports witness.
Importations of foodstuffs were 23 per cent less in June, 1921, than they were in December, and 18 per cent less than in June, 1920. This indicates some genuine improvement in French agricultural conditions. Agriculture is not directly affected by business depression, and a decrease in imports of foodstuffs, in the main, indicates increased domestic production of foodstuffs. In the year 1920 agricultural production increased considerably as compared with the year previous. Further improvement would no doubt have been shown this year had it not been for the unprecedented drought. As it stands, however, agricultural production in France will probably be smaller than it was last year, with the result that food imports for the second half of 1921 will not be much less than they were a year ago. The fact that the Hoover Relief Organization has had to resume operations in the devastated areas this summer is significant.
The conclusion with reference to French foreign trade, therefore, is that the data which have been so widely quoted as proof of remarkable improvement in France prove nothing of the kind. There has seldom been a more egregious error in the interpretation of economic data than that which finds in recent French trade figures evidences of remarkable improvement in French conditions. The collapse of French imports, which alone accounts for the "favorable" trade balance, is apparently due in part to the curtailment of American export credits; but it is in the main a reflection of the world-wide business depression. All that can be said is that French exports have held up surprisingly well as compared with those of other nations.
Italian Foreign Trade
The following data show the present foreign trade position of Italy:
(In lire 000,000 omitted)
Adverse Exports Imports Balance
1919, monthly average 506 1,385 879
1920, "" 650 1,322 672
1920
August 532 1,249 717
September 570 1,202 632
October 707 1.126 419
November 73i 1.240 509
December 853 1,591 738
1921
January 503 1,166 663
February 566 1,320 754
March 569 i,503 934
April 586 1,346 760
453 1,191 738
It should be noted first that Italian exports this year are only a little larger than in 1919, and that they are now running considerably less than the average for 1920. Moreover, they have fallen very materially since the peak was reached last autumn. This in spite of the fact that the process of inflation has not been so definitely checked in Italy as in France.
' These figures refer to 1919 value units.
Adverse
Imports
Balance
1.385
879
1.322
672
1.240
717
1,202
632
1,126
419
1,240
509
1. 59i
738
1,166
663
1.320
754
1.503
934
".346
760
The second point to be observed is that the Italian trade balance has not, like that of France, improved in recent months. This is because the imports have not as yet shown any tendency to decline, doubtless because of the persistence of inflation in Italy, the data on which will be presented in Chapter IV.
Swedish Foreign Trade
The following trade data for Sweden may be taken as typical of those for the neutral countries of Europe. All figures are computed on the basis of 1919 value units.
(In kroner, 000,000 omitted)
Adverse Exports
Imports Balance
1919, monthly average 131
an 80
Iago, " 191
281 90
1920
August 230
308 78
September 233
325 92
October 218
299 81
November 177
228 51
December 171
197 26
1921
January 91
122 31
February 89
116 27
March 75
April 69
May 82
The balance has been reduced somewhat, but only because the imports have fallen a bit more than the exports. The significant thing is that Swedish trade in general is
211
80
281
90
308
78
325
92
299
81
228
51
197
26
122
31
116
27
99
24
106
37
95
13 stagnant. The neutral countries generally have suffered quite as much from the world-wide depression as have the belligerent nations.
Discussion of German foreign trade is reserved for the chapter on Germany's ability to pay. It only remains to state that the trade of the other former Central Powers has suffered greatly this year, as has also that of Russia, Poland, and the other states created by the peace settlement.
The conclusion of the chapter is, clearly enough, that European trade this year has, on the whole, been very much less satisfactory than it was in 1920. According to the foreign trade index, Europe is not as yet coming back; on the contrary, the real economic aftermath of the war is now making itself felt.